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business newsStock Markets Breathe Easier After European Debt/Banking Deal Announcement
While short on details, the European plan hit the trifecta of concern points the market has been focused on.
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The market got more than it expected from Europe last week, a big reason global stock markets had such a strong rally. While short on details, the European plan agreed to late Wednesday night hit the trifecta of concern points the market has been focused on: meaningful cuts to Greece’s debt obligations, European bank recapitalizations by June 2012, and leveraging of the European Financial Stability Fund up to $1.4 trillion to help firewall the crisis. Given the size of the market rally on the news, the key politicos were no doubt pleased that they were able to alleviate some of significant pressure they have recently been under. The global stock market reaction on Thursday was significant, with core European markets up 4% to 6% and the U.S. stock market up 3%, an indicator of how big an overhang Europe’s problems have been on global stock markets. On the surface it all sounded good to stock investors, but credit markets were not as impressed. The Italian 10-year bond yield remained above 6%, perhaps an early indicator that the deal announced still has too many unknowns to take this risk issue completely off the table. The TED spread and similar gauges of short-term lending in credit markets also remained highly elevated post the deal announcement.
Last week, the S&P 500 Index returned +3.8%. October month to date, the S&P 500 Index has returned +13.7% and +3.9% year to date. The Russell 2000 Index of small cap stocks had a huge “risk-on” pop, returning +6.8% for the week. October month to date the Russell 2000 Index has returned +18.2% and -1.9% year to date. The MSCI EAFE Index of developed international markets returned +6.4% last week. October month to date the MSCI EAFE has returned +13.7% and -3.3% year to date. The MSCI Emerging Markets Index was another beneficiary of the “risk-on” trade as the MSCI EM Index returned +9.8% last week. October month to date the MSCI EM Index has returned +14.9% and -10.2% year to date. Treasury bonds sold off as the stock market soared, although not as much as one would have expected given the size of the stock market rally. The 10-year U.S. Treasury ended the week at a yield of 2.31%, up from the October 21 2.21% level. The investment grade fixed income markets as measured by the Barclays Aggregate Bond Index had a modest gain for the week and has returned -0.4% for October and +6.3% year to date.
For third-quarter earnings, 324 of the S&P 500 companies have reported so far, with 65% beating revenue estimates and 71% beating earnings estimates. While these may seem like impressive beat levels, these are in line with recent quarterly trends. In addition, the number of companies raising guidance has decelerated significantly compared to recent quarters. Managements, based on recent economic trends, are now adopting a more cautious tone. While 2011 earnings should be a bit higher than expected a few weeks ago, Calender Year 2012 S&P 500 estimates have declined to $108 from $113, and the 2012 earnings reset process may not yet be complete. An increasing number of small cap companies will report earnings over the next few weeks, broadening out the full earnings picture. This week there will be a two-day Federal Reserve meeting and press conference and some early macro indicators for October such as the ISM, nonfarm payrolls, construction spending, factory orders, and U.S. auto sales. These events will provide another round a perspective on the state of the U.S. economy.
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